Going Concern Opinions and Management's Forward Looking Disclosures: Evidence from the MD&A

Abstract

In this study we examine the relationship between the auditor’s going concern opinion and management’s forward-looking disclosures in the Management’s Discussion and Analysis (MD&A) section of 10-K filings. The research objective is two-fold and addresses whether the presence of a going concern opinion is associated with (1) the quantity of forward-looking disclosures and (2) the clarity of the forward-looking disclosures. We examine MD&A disclosures from a sample of 2,365 financially distressed companies over the fiscal years 2010-2014 and find that while the absolute number of forward-looking disclosures is lower for companies receiving a going concern opinion, the proportion of forward-looking disclosures in the MD&A is greater in the presence of a going concern opinion. We also find that the forward-looking disclosures are clearer communications, as evidenced by the use of less equivocation, when the company receives a going concern opinion. In addition, we find that forward-looking disclosures are significantly different for first-time versus continuing going concern opinions. In sum, our results suggest generally improved forward-looking disclosures in MD&A when companies receive a going concern opinion from their auditor.